I provide independent research of technology companies and was previously one of two analysts that determined the technology holdings for Atlantic Trust (Invesco's high net worth group), a firm with $15 billion under management. Before joining Atlantic Trust I was the Internet Security Software analyst for Smith Barney (where I authored the most comprehensive industry report “Internet Security Software: The Ultimate Internet Infrastructure”) and an Enterprise Server Hardware analyst at Salomon Brothers. Prior to becoming an equity analyst, I spent 16 years at IBM in a variety of sales and manufacturing positions. I have a B.S. in Industrial Engineering from Stanford University and a Postgraduate Diploma in Economics from the University of Sussex, England.

Analysis Of Tesla's September Quarter 10-Q

It can be worthwhile to crawl through Tesla’s 10-Q’s as that is where it discloses items such as geographic revenue, warranty expense and ZEV credits. Some of the more interesting information is Europe generating 34% of automotive sales, warranty accruals increasing and resale guarantees on almost half of the cars sold in the quarter.

Europe generated 34% of automotive revenue

Tesla generated significant revenue of $146 million in European automotive sales starting in August. The 10-Q provides a breakdown by geography with the following detail:

The U.S. generated $285 million in automotive revenue or 66% of the total.

Europe generated $146 million in automotive revenue or 34% of the total.

If the leasing revenue was split along the same percentage then there were

About 3,650 cars sold in the U.S.

About 1,870 cars sold in Europe

This is a strong start for Europe since sales started in August, but there was a fair amount of pent-up orders and demand

Warranty provisions increased to 3% of revenue

Tesla set aside $18.4 million for warranty provisions in the September quarter or 3.0% of revenue. For the year the company has accrued $44 million which is 2.5% of revenue. The first three quarters charge is a bit lower than the 2.4% for all of 2012 and compares to Ford’s 1.6% and 1.4% in 2011 and 2012, respectively.

When you subtract the Development Services and Powertrain sales from the total sales the average price of a car was $108 thousand in the quarter.

Resale guarantees were provided to 31% of North American vehicles in the June quarter and increased to 44% in the September quarter. The company expects it to remain at the current level in the near-term.

Gross margins can be negatively or positively impacted by incurring development costs or services to third-parties such as Mercedes-BenzMercedes-Benz or Toyota due to timing of when revenue or expenses are incurred.

R&D expenses to increase 25% quarter over quarter for the December quarter.

SG&A expenses to increase 20% quarter over quarter for the December quarter.

Capital expenditures to be between $75 and $85 million in the December quarter.

Finished goods inventory increased from $77.9 million in the June quarter to $102.4 million in September. This should be largely attributable to cars shipping to Europe which would be approximately 225 cars.

Powertrain components and related sales decreased from $10.4 million in the September 2012 quarter and $13.3 million in the June 2013 quarter to $8.2 million in the September 2013 quarter.

Powertrain sales to Toyota for the RAV4 EV deceased from $10.4 million a year ago to $7.2 million in the September 2013 quarter

The $660 million convertible note can be exchanged for common stock in the December quarter but the 5.3 million share dilution has been largely hedged.

Credits are having less of an impact

ZEV credits were $10.4 million in the quarter or 1.7% of revenue, down from $51.5 million in the June quarter. Tesla is not counting on ZEV credits as part of its 25% gross margin guidance.

Other regulatory credits were $14.8 million in the quarter or 2.5% of revenue. These credits should continue and are part of the company’s gross margin forecast going forward.

Long-term battery concerns

In October 2013 Tesla struck an agreement with PanasonicPanasonic to provide a minimum of 1.8 billion lithium-ion batteries between 2014 and 2017 with preferential prices.

To put this in context if a Tesla car needs 5,000 batteries (assuming better battery efficiencies and fewer used in a Gen III) and Panasonic provides 2 billion batteries that is only enough for 400,000 cars over a four year period. While the supply will ramp over the four years this may only support 150,000 cars built in 2017. This is an example that shows Tesla needs billions of batteries per year to support the production projections analysts are using to develop target stock prices.

In the 10-Q Tesla states “While we continue to ramp production, in the near term the increase in cell capacity from our supplier is a key constraint that we are managing.” I believe the company can manage getting enough batteries even with a doubling or tripling of car production. The challenge will be getting enough batteries to support hundreds of thousands of cars per year.

This and scaling production twenty times or more are the biggest concerns I have for the company. It can still be successful at lower production levels than the half million that is discussed but any slippage will negatively impact the shares.

Future cars timelines

Model X is slated to start production in late 2014 and ramp up to full production in the second quarter of 2015.

While it wasn’t talked about in the 10-Q the Gen III’s schedule it is estimated to launch in late 2016 with it ramping in 2017.

Post Your Comment

Post Your Reply

Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out.